Certifications

May 2011

May 04, 2011

Friday's employment situation report once again is the focus of the financial markets. With the perception that the economy has hit another "soft patch" the report assumes special significance.

Corporate earnings have been excellent, but there is continuing skepticism about economic growth. Since everyone agrees about the importance of jobs, the monthly employment situation report looms large.

Each month there are several different estimates of job growth. The BLS has an approach, reflecting one methodology. This method, which is very strong within the context of the approach, is regarded as the "official" verdict on monthly employment growth.

This is a mistake, since other private methods provide equally valuable insights on the employment situation.

Let me start with some background on my approach.

Our Own Estimate

The non-farm payroll report is based upon a monthly survey, attempting to estimate all of the jobs for the week including the 12th of the month. Eachmonth my team asks the question, "What change in payroll employment would be consistent with other economic data from the same time period (the week including the 12th of the prior month)?

This is not a forecast, per se, since we do not posit any causal relationship among these variables. They are all concurrent indicators of economic activity.

We use the four-week moving average of initial unemployment claims, culminating in the week of the employment survey. This is the best direct indicator of new job losses. The current rate is 404K, up slightly from last month.

We look at the University of Michigan sentiment survey, which we find to be more useful than the Conference Board's sentiment index. Michigan uses a panel, where some families are carried over from month to month. This is a good technique. Sentiment is influenced by employment. When people have lost jobs they are worried, it shows up in sentiment. It is a good concurrent indicator. The Michigan index is now at 69.8, up two points from last month, but down from 77.5 in February.

We use the ISM manufacturing index. This is 60.4, down slightly from levels of the last three months. This is the most bullish of the various indicators.

Our long-term record has been very good, especially when compared to the final revised data. This makes sense because our model was derived from the final data. Our approach also makes logical sense, because it involves some factors related to jobs lost, and some related to job creation.

Based upon the data, our estimate is for a gain of only 56K jobs.

I think my approach might be a bit too bearish. Consumer confidence is usually a good refleciton of job growth, but right now it probably also reflects high gas prices. We have not had enough data to do a good statistical control for this.

Readers should also keep in mind that the BLS estimate has a 90% confidence interval (just for sampling error) of+/- 100K jobs. Even if Friday's report seems good, I am suspicious because of the weak nature of the other economic data.

Other Forecasts

It is always interesting to compare the job forecasts from different sources. We follow several because of the widely varying methods they use. A wise interpretation would be to consider all of these disparate sources of information.

All of us are dealing with unusual circumstances because of the census hiring and later layoffs. This is not something that fits nicely into a model. The various forecasts should all be interpreted within that framework.

ADP has proprietary data because of its payroll management business. Looking only at private sector jobs -- no government, no census effect, ADP sees gains of 179,000 jobs.

TrimTabs has another valuable approach -- tax deposits. Their forecast is a gain of 181K.

To summarize briefly, the market incorrectly focuses on predicting the BLS preliminary estimate -- including the 100K confidence interval, the seasonal adjustments, and the benchmark revisions. I am probably the strongest supporter of BLS methodology and integrity, but I still see their approach as only one method out of many.

Jobs data is so important -- and we are all so interested -- that we seize upon whatever information we have, even when we know the limitations.

Investment Take

As usual, I am cautious about the jobs report. Given all of the other economic data, it is hard to believe that we will have brisk job growth. My guess is that other market participants will see this the same way. In fact, the market may not actually be expecting very much.

I am still looking for a good entry point for some accounts. Waiting until after the number on Friday may provide some good short-term timing.

May 03, 2011

What if you could find a stock that was exciting for both value and growth investors? Can there be such a company?

A value investor would want to find a sound balance sheet, a strong return on invested equity, and sound prospects for the future.

The growth investor would pay attention to earnings growth, the P/E multiple, and future growth prospects.

A Company to Consider

One of my five investment programs focuses specifically on Great Stocks -- great companies, great management, great prices. It has been my most successful program, beating the S&P 500 nicely over more than ten years. When it trails, it is usually because the market is "selling winners."

Occasionaly I write about one of our selections.

Using my criteria, please consider the following facts:

Stock price -- about $35.

Cash and marketable securities -- $6.50 per share.

No debt.

EPS of $2.70

Earnings growth of about 60% every year for the last three years.

A broad product line, with massive demand for the newest entry.

This is a stock that is exciting in terms of both value and growth.

Hiding in Plain Sight

Why does this value persist?

I think there are two reasons.

In a long-term success story the stock price runs higher. Just like the current market, people think they have missed out. This means they will never get on board.

There is intense skepticism about continuing growth and many rumors.

And the Mystery Stock is..... Apple

Astute readers may have noticed that the facts fit the Apple (AAPL) story. All of the numbers have been divided by ten.

Last February I wrote a similar article, suggesting that most people incorrectly focused on the absolute stock price rather than the underlying fundamentals. I suggested that readers should divide everything by ten, pretending that Apple did a 10-1 stock split.

I strongly recommend that readers go back to the old article and compare it to the current situation. It is not that I am predicting a 10-1 split (but I would not be surprised). Instead, I suggest that people think about individual stocks and the market as a whole in terms of earnings and growth, not using absolute price. The price makes you think you have missed out.

Every day is a new one for investors. Look ahead!

The Current Apple Debate

There are some current articles about Apple and the huge cash accumulation. What a great problem to have.

Here is an intriguing article suggesting that the market values Apple only on cash. (HT Abnormal Returns). The author nicely acknowledges the correlation/causation issues and his interesting charts of stock price versus earnings, earnings growth, and cash.

CNBC's Fast Money has a good discussion featuring Herb Greenberg and Karen Finerman about what the company should do with the cash. Take a look.

To stay focused on data, I always recommend Chuck Carnevale's EDMP site. He carefully warns that the earnings summary chart is just a starting point. I agree, but it is a very good place to begin. Take a look.

Investment Conclusion

Apple continues to be an attractive stock. Many have missed out by making common mistakes instead of looking at earnings and earnings growth.

Investors could try the same exercise on the S&P or the Dow. Just divide everything by 2. You may be surprised to see that you have a situation similar to the March 2009 bottom, but with less risk.

Reader Note: I'll be appearing in a Focus Roundtable tomorrow on monetary policy and the economy. It is free to join the Focus group and to ask questions. It promises to be a good session, and I am looking forward to it.

May 01, 2011

When the market is climbing the "wall of worry" the problems often change from week to week. Most investors do not grasp this concept, thinking that the wall of worry is something really bad. In fact, markets thrive when there is a long list of well-publicized problems. (Some readers have kindly written that this article really helped them to appreciate the concept).

Over the last two weeks the focus has been on earnings (great) and Fed policy (accomodative - whether you like that approach or not). Briefly put, the worries have been addressed, and stocks have moved higher. This week's challenge will be employment. Will job creation continue the recent improvement?

Let's begin with our regular review of last week's data.

Background on "Weighing the Week Ahead"

There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.

In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but some will disagree. That is what makes a market!

Last Week's Data

The news was really great on earnings, expectedly soft on the the GDP, and as expected concerning the Fed.

The Good

Most major economic indicators show that the US economy has returned to its normal state, self-sustaining growth. Many seem to have forgotten that economic growth is normal, including the use of slack resources to expand and to build new businesses.

Economic growth forecasts improved. The ECRI Weekly Leading Index decreased very slightly, but remains at solid levels. Check out the link to see Doug Short's analysis.

Risk as measured by the St. Louis Fed Stress Index, remains very low. This measure tracks a lot of market data in the eighteen inputs. It is not a poll, nor opinions, nor a collection of anecdotes. We should all pay attention to some real data. The value moved to -0.156, a bit lower than last week's -0.143 (adjusted). These are completely normal readings for a scale measured in standard deviations from the norm. For more interpretation, the St. Louis Fed published a short paper with a very nice chart that helps to interpret this index. The chart does not reflect the recent continued decline in stress, but it identifies the dates for important recent events. The paper also has a longer version of the chart, illustrating past stress periods. I am not going to run the chart each week, but I strongly recommend that readers look at the paper. In the 2008 decline there was plenty of warning from this index -- no sign right now. The scale is in standard deviations, so anything short of 1.0 or so is neutral territory. I am doing more extensive research on this indicator.

Earnings have beaten expectations. Solidly.

Consumer confidence solidified, but at lower levels.

NB: The ECRI and SLFSI are actually readings from week-old data.

The Bad

The biggest negative was the continuing spike in energy prices.

Energy prices move higher yet again. Gasoline prices were up five cents in a week. There is continuing stress in the MENA region, with a very uncertain outcome. The price increases directly affect other discrectionary spending.

Initial jobless claims continued to be elevated. We are continuing with the 4-handle. This series is only one part of the employment story, but everyone agrees on the significance. It is a real-time data series from a good source. I follow it closely, and the story has not been good.

Housing, by any measure, remains very poor. There is another bad story every week. This week the Goldman estimate of 3.5 million vacant housing units grabbed my attention.

GDP was weak, but still positive and in line with the most recent expectations.

The Ugly

The US debt story gets the continuing "ugly" award.

The debt story will continue with the political focus on the debt limit and whether it will be raised. I have a continuing forecast that the debt limit will be increased in a timely fashion, but I would not be surprised by a continuing display of self-serving brinksmanship. This will be a market negative until it is resolved.

Our Own Forecast

We base our "official" weekly posture on ratings from our TCA-ETF "Felix" model. After a mostly bullish posture for several months, Felix has turned much more cautious. We shifted from our neutral posture to bullish three weeks ago, and we continue that posture in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. This is based on improved ratings in the various index ETFs, as well as the general trend. Here is what we see:

73% of our 56 ETF's have a positive rating, up nicely from 61% last week. This is a big break in the recent trend.

Only 50% of our 56 sectors are in our "penalty box," about the same as 46% last week. This is an indication of moderate short-term risk, and the picture is improving.

Our universe has a median strength of only +11, up slightly from +6 last week.

The overall picture was about the same last week. We are still 100% invested in trading accounts, since there are many attractive sectors.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

The big news for the week, competing with corporate earnings, will be all of the stories about jobs. The ISM survey is one of the best indicators of job growth, so I follow that carefully. We already know that initial claims are a negative factor, and consumer confidence is also weak.

The market is very sensitive to weakness in economic growth, so the ADP jobs data and Friday's employment situation report will both be extremely important. I'll do my regular employment preview on Wednesday.

Breaking News

As I write this, the story is breaking that Osama Bin Laden is dead. The initial market reaction to this milestone in the war against terrorism will be positive. It is always tricky to balance interpretations of political and policy results with market reactions. In this case, most would conclude that the terrorist threat has been reduced.

For each of these I try to use objective measures, avoiding emotion. Having said this, I still do not see a rush to go "all in." For new long-term accounts I am buying 50% right away in the names we love and waiting for dips for additional buys.

The time frame and your own needs are most important in your investment decisions.